Tenanted residential blocks offer hidden opportunities for investors

Statutory compliance and increased regulation levied on private landlords presents opportunities for investors, says Knight Frank.

Tenanted residential blocks offer hidden opportunities for investors, says Knight Frank | BTR News
Image credit: Investors by Nick Youngson CC BY-SA 3.0 Pix4free.

With a shift in the level of statutory compliance and increased regulation levied on private landlords, Knight Frank presents the opportunities this offers investors, as more tenanted residential blocks hit the market.

By Harrison Collins, a Partner in the Residential Investments team, Knight Frank

In the past, many small- and medium-sized tenanted residential blocks of flats in the UK were owned and managed by ‘accidental’ landlords, whose assets were typically passed down through family ownership – sometimes over several generations.

However, this situation has changed significantly over the last few years. The market is demanding more of these ‘accidental’ landlords than ever before, while larger, ‘professional’ landlords are cottoning on to the opportunities available by adding these small- and medium sized blocks to their wider portfolio.  

The big shift

The reason behind this change is a big shift in the level of statutory compliance and an increasing degree of regulation being levied on landlords, which is forcing them to take an active role in the asset management of their rental investments in a way they haven’t had to do before.

The Renters Reform Bill, which heralds one of the biggest private rented sector shake-ups for decades, has been on the agenda for some time. A whitepaper detailing the proposals was released in 2022, and the Bill could become law as early as spring 2024. Proposals include the abolishment of Section 21 notices, rental increases limited to once a year, and the end of fixed term Assured and Assured Shorthold tenancies.

On top of this, private landlords are also contending with changes to the requirements for Minimum Energy Efficiency Standards (MEES). It is proposed that all new tenancies must have an EPC rating of C or above by 2025, while all existing tenancies must have an EPC rating of C or above by 2028. The cost of these new regulations for landlords will be significant. While many factors impact the exact financial implications – including the size, age, and existing efficiency of a dwelling – we estimate that it typically costs approx. £5,500 to make the necessary changes to improve a property’s EPC rating from D to C. This figure almost doubles to over £10,000 to move a property from an EPC band F or G to band C.

Landlords must also consider a raft of other compliance factors including gas and fire safety, electrical installation condition report (EICR), asbestos, portable appliance testing (PAT), legionella risk assessments, Right to Rent checks, registering deposits and various national and local licences.

Benefits to investors

These combined changes will not only cost private landlords a lot of money but also a lot of time. For those who have inherited assets from family, the cons of property ownership might start to outweigh the pros. The question is, do private landlords want the responsibility of having to actively manage their asset? The answer for many is probably no.

As a result, we are seeing several tenanted residential blocks coming to the market, which presents a huge opportunity for professional investors who have the management capabilities to acquire these assets and make the necessary upgrades. In recent months, Knight Frank has helped several landlords dispose of and investors acquire these blocks.

There are many benefits for investors acquiring an asset of this kind, and while investing into properties to improve aspects such as an EPC rating carries with it initial cost, they provide significant long-term benefits.

By upgrading and repositioning, professional landlords can return these assets to the market with new facilities and upgraded accommodation that will ultimately command a higher rent, while regular ongoing maintenance costs will be reduced. In some cases, we are seeing more attractive debt facilities through ‘green’ loans become available to landlords who are providing energy efficient properties.

Given the recent significant rise in energy costs, which is placing increasing pressure on tenants’ finances, high-quality accommodation with upgraded ESG credentials will help retain tenants over a longer period of time, and in turn generate higher rents and better returns.

The value of the property is also significantly improved, if at any point the investors want to sell the asset on. Knight Frank’s analysis found that homes which had moved from a D to C rating added an additional 3% to their value over and above local house price growth (approx. £9,003 based on the average resale value). Homes moving up two bands from E to C saw an average price uplift of 8.8% (approx. £29,289), whilst homes moving up from F or G to C saw a 19.6% uplift (approx. £64,444).

With the Renters Reform Bill and other compliance considerations forcing private legacy landlords to take a far more active role in block management, the opportunity for larger, professional investors is extremely exciting.

As we approach a number of these legislative milestones, Knight Frank expects to bring a growing proportion of assets to the market that offer professional landlords’ significant opportunities. The ability to turn the upcoming changes into competitive advantages through a wider tenant offering and improved energy efficiency will see portfolio landlords differentiate their assets and ultimately drive higher returns.